© ACCA Public

Forecasting in a Time of UncertaintyRoss Maynard FCMA

1Ideas into Action

© ACCA Public

Our Agenda1. Revisiting the purpose of forecasting

2. The problems of traditional approaches to forecasting

3. Becoming more Agile

4. Principles for Agile forecasting

5. A Methodology for Agile Forecasting

6. The Scrum Process

7. Tools for Forecasting in times of Uncertainty

8. Using simulation to explore possible outcomes

2Ideas into Action

© ACCA Public

Part One

Revisiting the Purpose of Forecasting

3Ideas into Action

© ACCA Public

"The purpose of a forecast is to get issues on the radar screen early

enough to be able to take necessary actions. It is not necessarily about

being right, but about being ready."

Bjarte Bogsnes, “Implementing Beyond Budgeting”, 2016

The Purpose of Forecasting

4

Forecasting is not about being accurate about the outcome

but about identifying the issues that matter to the plan

Ideas into Action

© ACCA Public

The Problem with Traditional Approaches

5

Traditional Approach Weakness

Rigid timetable Changes in the business environment

can happen very rapidly.

Months of preparation (“bottom up”, “top

down”) followed by political machinations

to “agree” (impose) management’s will

This is costly and the politics of it is

demotivating. Before it is even “live” we

know the plan won’t work!

The final plan is locked in place for the

whole year

The “plan” is only one possible outcome

of many: circumstances change

Regular review is coordinated centrally in

a very organised manner

Revenue forecasts become a glass

ceiling and cost targets become a floor:

“We have to spend it or we’ll lose it”

Ideas into Action

© ACCA Public

More Problems with Traditional Approaches

6

Traditional Approach Weakness

Managers are judged on their ability to

meet the budget with career prospects

rated accordingly

The difference between the actual result

and the plan may be due to incorrect

assumptions or changing circumstances

Incentives for achieving the targets;

pressure on those who fail to “make the

numbers”

All sorts of dysfunctional behaviours

arise: sandbagging, hiding the truth,

fiddling the figures

The process is very hierarchical Creativity and flexible decision-making in

changing circumstances is stifled

The organisation becomes focussed on

meeting the plan

The organisation becomes rigid and

inward looking, losing touch with reality

Ideas into Action

© ACCA Public

1. It is an entirely linear process with little flexibility

2. People tend to “play it safe”, afraid of making changes

3. The world does not work in annual cycles and a rapidly changing

market will not wait for you to go through another four-month

preparation phase; followed by a negotiation phase; followed by roll-out

The Three Main Problems with the Traditional Approach

7Ideas into Action

© ACCA Public

1. Forecasting is a form of scanning the environment, not restricting the

business to pre-determined boundaries

2. The purpose of forecasting is to identify gaps and highlight areas where

further action is needed – not to set budgets

3. Fixed budgets and targets will not work. Forecasts must be updated as

market and business conditions change

4. The forecasting horizon is linked to the rate of change in the market or

business environment. Different elements may have different forecast

periods depending on the volatility of the business areas

Forecasting in Times of Uncertainty

8Ideas into Action

© ACCA Public

Part Two

Becoming more Agile

9Ideas into Action

© ACCA Public

Uncertain times need Flexibility

10

“Budgeting might well work if it were possible to make well-founded

assumptions about the future: if we were able to predict with confidence –

twelve months in advance – what customers, competitors and the economy

were likely to do”

Dr. Steve Morlidge, The Little Book of Beyond Budgeting, 2017

Ideas into Action

© ACCA Public

• “Agile” is a buzzword that has been around in the I.T. industry for over

15 years

• It emphasises the need to move from a “linear” planning and control

framework to flexible and adaptive processes

• It focusses on the need to change rapidly; to develop and amend

plans; and to continuously revise plans as circumstances unfold

What is Agile?

11

Agile Accounting courses on www.accountingcpd.net

Ideas into Action

© ACCA Public

A Definition of Agile

12

“Agile methods are human methods. … We learn from a very early age that

anything worth doing well must be done iteratively through a process of

successive refinement”

Robert C. Martin, one of the contributors to the Agile Manifesto

Ideas into Action

© ACCA Public

• Uncertainty is not a threat: Agile processes harness change for

competitive advantage

• Projects are built around motivated individuals. Give them the support

they need and trust them to get the work done.

• At regular intervals, the team reflects on how to become more

effective, then tunes and adjusts its actions accordingly

• The most efficient and effective method of conveying information to,

and within, a team is face-to-face conversation

Principles for Agile Forecasting

13Ideas into Action

© ACCA Public

Decentralised Teams

The organisationVision is broken down into goals and Critical Success Factors

Planning teams are formed to address one or more goals or CSFs. Each team makes its own plans to achieve the goals/ CSFs.

The plan is not centralised, it can be adapted as needs change

Removing Barriers

The purpose of the Senior Planning Team is to set the Vision and identify the strategic Critical Success Factors –the top level themes that matter

Separate cross-functional teams take forward specific areas

The senior team are there to remove barriers and keep things moving

Performance Management

The plan is about identifying the issues that matter and need close management attention

The focus of review is on strengthening and adapting plans as the environment changes – not on judging individuals and teams

The process is collaborative and iterative rather than defensive and political

Frequent Reviews

Each planning team meets regularly to review progress and scan the horizon

Plans and actions are updated as needed with the Senior Planning Team kept informed

As far as possible, the planning team do their work face to face in a team planning room displaying their work

14Making Forecasting more Agile

© ACCA Public

• It is faster with less bureaucracy and lower cost: no “top down”,

“bottom up” or political manoeuvring

• It offers greater flexibility to customer, market and business needs

• It is more accurate because of frequent iteration

• It delivers better results because it is adaptive to reality

• It brings higher engagement of staff who feel they are really adding

value

The Benefits of an Iterative and Collaborative Approach to Forecasting

15Ideas into Action

© ACCA Public

1. The cultural challenge of moving away from “command and control” which may be

difficult for staff who have become institutionalised in the old way

2. Senior management need to lessen their grip on control. Agile Forecasting relies on

devolved teams making crucial decisions as they adapt to changes in their

environment. Some senior managers may perceive this as a threat to their status

(and rewards)

3. Devolved decision-making can lead to a perceived weakening of organisational

cohesion. The purpose of the Senior Planning Team is to ensure alignment across

the organisation. Regular reviews also mean that issues are identified and

addressed promptly

4. There is the possibility of conflicting plans and actions across the organisation

The Challenges of the Agile Approach

16Ideas into Action

© ACCA Public

Part Three

A Methodology for Agile Forecasting

17Ideas into Action

© ACCA Public

• “Agile” is a set of principles and values; and a number of methodologies have

been develop to give structure to these principles

• “Scrum” is the most widely used of those methodologies

• A “scrum” is a play in the team game of rugby that involves eight players from

each side forming a crab-like structure - different specialists coming together to

form a cohesive unit

• Scrum is based on teams of three to nine members, who break their work into

actions that can be completed within timeboxed iterations, called Sprints,

(usually of 2 to 4 weeks). The team track progress and re-plan in short stand-

up meetings, called Scrum Meetings. There are also formal review sessions at

the end of each sprint

The “Scrum” Methodology

18Ideas into Action

© ACCA Public

• The “Product Owner” is the representative of the Senior Planning Team who sets

the priorities for the planning team; provides support to remove blockages or

address decisions that need higher-level input; is part of the review of the team’s

output; and ensures alignment across teams

• The “Scrum Master” is the coach who helps planning teams develop the skills

they need; organises resources; and builds contacts with other teams or

specialists. He/she is not part of the planning team and will support several teams

• The Planning Team do the work of preparing plans to meet the goals, objectives

and priorities they have been assigned by the Senior Planning Team. Typically 3

to 9 members, they are self-organising with no seniority. Specialists may be called

in as needed. Their planning work may be full-time or part-time as business

priorities dictate

Roles in Scrum

19Ideas into Action

© ACCA Public

Scrum

20

There is no “Project Manager” as such in

Scrum. The Product Owner sets priorities and

assesses output; the Scrum Master organises

resources and coaches; but the Planning

Team is self-organising

The determination within Agile to avoid

“command and control” might take time to

adjust to but delivers benefits in terms of

greater engagement within the team since

they are responsible their own destiny. This

leads to better quality outputs

Ideas into Action

© ACCA Public

A “Sprint” is a two to four-week cycle comprising four elements:

1. Sprint Planning – the team review the priorities with the Product Owner and

agree what they can deliver in the cycle. They then plan their work for the period

2. Scrum Meetings – frequent 10-20 minute update meetings within the Planning

Team. Often daily. The Scrum Master may attend if there are issues outside the

team

3. Sprint Review – the Product Owner reviews the output of the Sprint with the

team at the end of the cycle. Additional work may be requested or the next set of

priorities agreed

4. Sprint Retrospective – the Planning Team alone, facilitated by the Scrum

Master, reflect on what went well and what didn’t. Focussing on improving

teamworking, additional support or training may be requested

The Scrum Process: The Sprint

21Ideas into Action

© ACCA Public

Senior Planning Team

Decide how many Planning Teams they need: one per market segment; or per brand; or division

Market focussed rather than by internal department

Decide Vision, strategic goals and top-level Critical Success Factors

Refresh Vision and goals quarterly in light of environmental changes

Product Owner

Liaison between the Planning Teams and Senior Planning Team (and may be part of it)

Communicates goals and CSFs to each Planning Team

Raises up issues that need senior attention

Brings the output of the Planning Team Sprint cycles to the Senior Planning Team

Planning Team

Work in 2 to 4 week “Sprint” cycles

Each Sprint addresses specific goals or priorities agreed with the Product Owner

Self-managing and responsible for their own outputs –analysed at Sprint Review

No hierarchy and seek to improve their own working at Sprint Retrospective

Scrum Master

A facilitator rather than a project manager

Provides resources and training for the Planning Teams

May facilitate inexperienced teams

Addresses blockages or raises them up to Senior Planning Team via Product Owner if required

22Features of Agile Forecasting with Scrum

© ACCA Public

Issues for Management

▪ Managers need to be part of the process: alive to the possibility of change (and enjoying the flexibility)

▪ Managers must stop trying to know all the answers and focus instead on facilitation, support, skills development and removing road-blocks

▪ Managers must trust the Planning Teams to do the detailed work well; to be responsive to changes in the environment; and to feed-back important information that they learn

▪ Hierarchical performance management must be ditched in favour of team rewards and supporting improvement

23Ideas into Action

© ACCA Public

1. Agile forecasting is a process of constantly scanning and adapting to the

environment in order to sustain and develop the organisation in a changing world

2. The plan is never “signed-off”. The Strategic Goals and Critical Success Factors

are regularly refined and revised by the Senior Management Team (quarterly) in

the light of developments in the market and the business environment

3. Business Planning is a continuous process, not an annual cycle. The constantly

evolving plan becomes part of the organisation’s culture and way of working

4. Detailed planning work takes place in 2 to 4 week “Sprints” covering defined

goals or Critical Success Factors. Regular feedback with the Senior Planning

Team keep everything and everyone in touch with the developing marketplace

5. Managers can no longer rely on fixed budgets and spending plans – things might

change to require a completely different set of actions

Agile Forecasting: Summary

24Ideas into Action

© ACCA Public

1. There is no finalised “plan”. Some traditionalists may like the predictable

framework of a signed-off plan launched to the organisation

2. Nor can the organisation say it has “delivered” its plan since it is constantly

evolving. However, an annual “stock-take” of progress can be prepared

3. Traditional approaches to performance management – holding managers to

account against pre-set targets, complete with traffic lights and variances – are

impossible. This requires a major mind-set change for some

4. The hierarchical structure of many organisations is undermined by Agile

forecasting which emphasises collaboration without status

5. Senior Management performance bonuses are strongly discouraged in Agile

where the emphasis is on team rewards rather than individual enticements

Criticisms of Agile Forecasting

25Ideas into Action

© ACCA Public

Part Four

Tools for Forecasting in Times of Uncertainty

26Ideas into Action

© ACCA Public

1. Forecasting must work within the Sprint cycles, so it is not surprising that

forecasts are not to line-item levels of detail

2. Decision-making timescales must be shortened so that resources are only

allocated at the latest possible moment to allow the greatest flexibility. This

requires frequent re-forecasting in decision critical areas of the business to

ensure the best decisions are made

3. Detailed forecasts are only attached to plans as the decision-point gets near.

Before then only broad estimates are required. This also reduces the workload

4. Forecasts focus on the areas of greatest value to the business. Line by line

budgets are not necessary

5. Rather than attaching specific numbers to a business stream or project, we often

use the concept of “relative forecasting”

Requirements for Agile Forecasting

27Ideas into Action

© ACCA Public

▪ Use Sensitivity Analysis to identify the

Levers of Performance

▪ Key customers, contracts, markets are

likely to be levers

▪ Also high fixed costs – staff, rents,

interest payments

▪ Commodities and components may be

vital to the business

▪ Focus your planning on those important

levers of performance

Don’t Sweat the Small Stuff

28Ideas into Action

© ACCA Public

1. You know what the key levers of performance are for your business, but you

don’t know how they are going to change in the future

2. You can use “Best Outcome”, “Worst Outcome”, “Most Likely Outcome” to test

business models but that still involves an element of prediction

3. You can use simulation to model many possible outcomes to show the range of

possibilities and the associated risk

Simulation: Testing Possible Outcomes

29Ideas into Action

© ACCA Public

Simulation 1: RANDBETWEEN

▪ Where you believe you know the approximate range of performance,

the RANDBETWEEN formula in Excel can be used to generate

random inputs within the defined range.

▪ This approach is much less accurate than the others, but is useful to

get a feel for the possibilities of performance

▪ By definition, the simulation will tend towards the average over many

iterations, so this approach is only suitable as a starting point to test

a model, or for low risk situations

30Ideas into Action

© ACCA Public 31

© ACCA Public

Simulation 2: Using a Normal Distribution

▪ Where you have data that is normally distributed, the NORM.INV

formula in Excel can be used to generate random inputs within the

defined range.

▪ This approach is the most accurate, provided your data is normally

distributed

▪ Remember: past performance is not necessarily a guide to the future

32Ideas into Action

© ACCA Public

1. Activate the “Data Analysis” Add-In in Excel and use the “Descriptive

Statistics” feature

2. Where:

▪ The Mean and Median are nearly the same

▪ Kurtosis lies between -2 and +2

▪ Skewness lies between -2 and +2

3. Your data approximates to a Normal Distribution

How do we Know our Data is Normally Distributed?

33Ideas into Action

© ACCA Public 34

© ACCA Public

1. The formula is NORM.INV(probability,mean,standard_deviation)

2. We use RAND() to select a random probability

3. Thus, NORM.INV(RAND(),mean,standard_deviation)

4. We can see it in action in this next video

Selecting Data from a Normal Distribution

35Ideas into Action

© ACCA Public 36

© ACCA Public

Simulation 3: Forecasting Demand

▪ In times of uncertainty using a Normal Distribution to model customer

demand may not be helpful. The impact of economic crisis may

mean that demand is no longer symmetrical around a mean point

▪ In such times, we should use the Poisson Distribution to model

demand. The Poisson Distribution does not rely on a symmetrical

spread of data

37Ideas into Action

© ACCA Public 38Ideas into Action

© ACCA Public

The Results of our Simulation

39

Net Profit/

Loss in

Month £

Cash

Balance at

End Month

12 £

Average 15,672 280,282

Standard Deviation 4,316 14,933

Minimum -34,000 169,110

Maximum 23,625 315,426

Number of times

below £10,000

18 0

Net Profit/

Loss in

Month £

Cash

Balance at

End Month

12 £

Average 3,547 140,711

Standard Deviation 2,279 8,546

Minimum -2,625 115,458

Maximum 18,250 176,543

Number of times

below £10,000

996 0

Average 400 Units Sold per Month Average 300 Units Sold per Month

Ideas into Action

© ACCA Public

Relative Forecasting

40Ideas into Action

© ACCA Public

1. Not all forecasts have to attempt to foretell specific costs and revenues. They are

inevitably wrong, so why use them?

2. Relative forecasting involves putting each project, or programme into a “pot”

alongside other elements believed to be of similar size. Thus, a plan might

comprise a group of “large” projects; another group of “medium-sized” projects;

and a group of “small projects”

3. The programmes or projects in the plan do not need separate forecasts; rather

each “pot” has an approximate size

4. In most cases, this approach is more accurate than adding up lots of detailed

forecasts – and it is much quicker and cheaper

5. Let’s look at an example

What is Relative Forecasting?

41Ideas into Action

© ACCA Public

Small or medium-sized company:

• The pot of “small” projects might be those estimated to cost up to £30,000

• The “medium” projects might be expected to cost between £30,000 and £60,000

• Now we can easily forecast the total investment required

• If there are ten “small” projects and four “medium” projects, then we estimate the

total investment to be £540,000.

• Some of the projects will likely go over the top-level of their estimate and some

will come in below, but the law of averages suggests that the total forecast would

still remain within a reasonable shout of the £540k total

• Result: cheap and easy rapid forecasting which is rarely less accurate than

detailed plans

Relative Forecasting Example

42Ideas into Action

© ACCA Public

Forecasting in times of Uncertainty

Closing Remarks

43Ideas into Action

© ACCA Public

1. The aim is to identify the key levers of success (or failure)

2. Focus on what matters to the business – key customers, products and services; specialist

components or commodities; areas of high fixed cost

3. Use short planning cycles – iterative forecasting in four week Sprints

4. Create small cross-functional planning teams focussed on particular priorities

5. The senior team set the vision and goals but not the detail. Trust the experts!

6. Use simulation to preview the possible range of outcomes

7. Relative forecasting to get an aggregate position is no less accurate at the top level than

detailed individual plans

8. Make the decision as late as feasible and keep recasting the forecasts

9. Update plans as conditions change

Forecasting in Times of Uncertainty

44Ideas into Action

© ACCA Public 45

Thank you

Ross Maynard

Ideas into Action